Granada-Carlton talks called off

TELEVISION groups Granada and Carlton Communications surprised the stock market with a statement that they had started and ended merger talks. The announcement had been spurred by Tuesday's 14% rise in Carlton's share price.

The two said they 'have been in discussions regarding a possible combination of their businesses, in step with proposed legislative changes. The two boards have decided not to pursue these discussions'.

The groups also repeated their warning that their joint venture ITV Digital needed 'urgent' and 'fundamental' cost-cutting to survive. Deloitte & Touche has been appointed to help.

Granada and Carlton together own 92% of ITV, and a merger to create a near-£5bn single ITV company has been seen as inevitable. But this is currently barred by legislation which, among other things, prevents one company from holding the London weekday and weekend ITV franchises.

The Government said in November that it will change the law to allow ITV to compete more effectively with new broadcasters such as BSkyB and the cable companies. But the new Broadcasting Bill is unlikely to become law until 2003.

That leaves a window for a foreign bidder, most widely expected to be Germany's Bertelsmann, to pick up Carlton, the weaker and less expensive of the two.

Carlton and Granada have, meanwhile, been coming much more close with joint ventures such as ITV Digital and common shareholdings in ITN and GMTV. They have also been looking at ways of putting together other parts of their operations before the law changes but without falling foul of competition legislation. The talks have been between Granada chairman Charles Allen and chief executive Steve Morris and Carlton chairman Michael Green and chief executive Gerry Murphy. Sources close to the companies played down constant gossip that Allen and Green are at daggers drawn.

Industry experts also pointed out the phraseology used in the statement. It referred neither to a merger nor a termination of the talks. This probably means that these were not full-scale merger talks but were more detailed endeavours to cut costs through putting together parts of the business. However, the reckoning was that the rewards of saving money were outweighed by the risks of a Competition Commission referral.

ITV Digital has already axed 600 jobs, one quarter of its workforce at its peak. It has lost £800m so far, as it struggles with competition from Rupert Murdoch's BSkyB satellite service. ITV Digital attracted 46,000 new subscribers in the three months to Christmas, but BSkyB far outstripped it with 218,000 signings.

Carlton shares fell 7p to 221p, while Granada put on 5p to 118 1/2p.